The Basic Types of Bonds
There are many different types of bonds, and they all have their own features. A bond is a fixed income security. Many times when government institutions or corporations have a need for funds they will issue bonds for sale to those who want to invest in them. There are various interest rates and times of maturity for the different types of bonds. There are specified intervals in which the investor gets paid interest, and once the bond matures the investor gets a return on their original investment.
The United States Treasury issues treasury bonds which are federally insured. These types of bonds have a low return since they are such a safe investment. The interest that you get from United States Treasury bonds is exempt from state and local taxes; however it is not exempt from federal income tax. You can get treasury bonds in different denominations, all the way up to $1 million. Every six months you get paid interest, and the maturities go up to 30 years. You cannot get these types of bonds from the US Treasury anymore, but they are still available on the secondary market.
The Federal government will still guarantee them as well. You can get municipal bonds from your local government entities. This means they are available through states, cities, counties, townships and utility districts. The profits go to the building of new schools, the construction of new roads and other government funded projects.
The interest is exempt from federal taxes. There are special cases in which local governments choose to make them tax exempt for local residents too. Even though municipal bonds provide a fairly high level of security, they are not quite as safe as US Treasury bonds.
Corporations issue what is called corporate bonds. The corporations will generally use the proceeds to fund their own growth. You can obtain short term corporate bonds that will mature in less than five years, intermediate term bonds with a maturity of five to twelve years, and finally long term corporate bonds which have maturities of more than twelve years. There is more risk involved with corporate bonds, so they have a higher yield.
Corporate bonds may also include convertible bonds. These types of bonds allow the bond holder to convert the bonds into shares of stock in the company that has issued them (usually at a pre-determined ratio). There are also callable bonds, and these give the corporation the ability to redeem the bond issue before the date of maturity.
There is also a type of bond called the zero coupon bond. These are issued at a discount but they do not pay interest.
High yield bonds are issued by organizations that weren't able to qualify for investment grade ratings by at least one of the major credit rating companies. This means that the issuer is high risk, and there is a chance that they may not pay your interest on time. The interest rates on these types of bonds are high, but this is because they are very risky.
Article Source: FxTradingStock.com
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Next, find out more about types of bonds in the best specialized website available on such delicate topic.
by: Joe Maldonado
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Date: Fri, 11 Mar 2011
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